LAM TAI KWAN v. LO WAI KIT

cacv 353/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 353 of 2006

(on appeal from HCA NO. 2581 of 2005)

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J U D G M E N T

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Hon Rogers VP:

1.  I agree with the judgment of Le Pichon JA.  There will therefore be an order in terms of paragraph 15 below.

Hon Le Pichon JA:

2.  This is an appeal from the order of Yam J dated 30 August 2006 dismissing the defendant’s appeal from the master’s decision granting the plaintiff summary judgment on three dishonoured cheques in the sum of $1,037,706.  At the conclusion of the appeal hearing judgment was reserved which we now give.

Background

3.  The plaintiff and the defendant were partners in a business trading under the name of Tung Shing (Kuen Fung) Pork Oil Company.  That business commenced in late 2002 and apart from trading in pork oil, a factory was set up and built in Hong Kong to manufacture the oil products themselves.  In January 2004, the trading operations ceased.  According to the plaintiff, he thought that the construction of the factory would also come to a halt.  Prior to the cessation of the trading business, both parties had made monetary contributions to the trading business as well as to the construction of the factory.

4.  Although the partnership was formally dissolved on 15 October 2004, it would appear that no account had been taken by the date of dissolution.  I pause here to observe that in practice, when a partnership is dissolved, the account will be taken up to the conclusion of the winding up because

“… some time or other must elapse between the dissolution and the final winding up of the affairs of the concern, and such time cannot in fairness to any one be excluded from consideration.”

See per Lord Eldon in Crawshay v Collins (1826) 2 Russ 325, 345.

5.  In April 2005, the plaintiff discovered that the factory was still in operation and manufacturing oil products and that he had no shares in it.  According to the plaintiff, he wanted to be bought out.  This in itself was hardly unreasonable given that no account had yet been taken and the affairs of the partnership had not been finally wound up.  He therefore met with the defendant in mid-April to discuss the figures and calculations with a view to the buyout and presented the defendant with two pieces of paper containing handwritten calculations for the defendant’s approval.  It was, as it were, a layman’s rough and ready attempt at striking an account for a final winding up of the partnership business.

6.  The first page recorded the plaintiff’s contribution to the partnership business including expenses associated with the construction of the factory as well as net income received by the plaintiff in the PRC.  The defendant’s contribution of HK$500,000 to the business expenses was also recorded.  The plaintiff explained that the consideration for the buy out of all his interest in the partnership business (which would include the factory since that was a partnership asset) was calculated on the basis that the plaintiff could enjoy one half of the company’s income without having to bear his half share of the company’s expenses which were to be wholly borne by the defendant.  That consideration came to HK$1,756,720 and the defendant agreed to it by delivering four post-dated cheques totalling that amount to the plaintiff.  The first cheque for $500,000 was honoured and it is only the remaining three totalling $1,256,720 that were dishonoured culminating in the present proceedings.  Subsequent to the proceedings, certain adjustments were made reducing the amount claimed to $1,037,706.

7.  The defendant’s version of events is set out in his second affirmation:

“ 5.       … the Plaintiff came to my new lard factory in about middle of April 2005 and requested to join as a partner of the factory, but I refused …  At that time the Plaintiff requested me to pay the balance of the debt due to the Bank.  I gave him a cheque of HK$500,000 post-dated 22 April 2005 and promised to repay him if I owed him for the Company already dissolved.

  6.       On 22 April 2005 the Plaintiff came and provided me with hand-written figures on 2 pieces of paper as exhibit marked “LWK-2”.  He alleged that I owed him HK$1,256,720.00.  The Plaintiff requested me to give him cheque at first to ease the pressure from his family members for it was a family business …  The Plaintiff promised that he would provide me with all documents to support those hand-written figures; if there were miscalculations, they might be corrected; and I might repay him by 3 installments.

  7.       In consideration of the Plaintiff’s promise to provide me with all documents to support those hand-written figures later, his need to ease the pressure from his family members and our friendship, I drew the 3 post-dated cheques in question and passed them to the Plaintiff for him on condition that he would not present them for payment unless and until he provided me with supporting documents and if there were miscalculation, there would have time to correct or return the cheques in question to me.”

Is there a valid defence?

8.  The defendant’s appeal was put on the basis that the judge erred in granting summary judgment because there were triable issues, in particular, whether any agreement was reached for a buyout in April 2005 when the post-dated cheques were handed over.  It was further submitted that the methodology for the accounting exercise evidenced by the handwritten calculations made no accounting sense and no reasonable businessman would have agreed to it.  Detailed submissions were made regarding the handwritten calculations.  But the present action is not a partnership action.  Rather, the cause of action is for dishonoured cheques and different considerations apply.

9.  It is the defendant’s pleaded case that the cheques were not validly delivered to the plaintiff who was therefore not entitled to sue on them because (a) they were delivered not with the intention to pass the amount stated on them to the plaintiff but at the plaintiff’s request to provide him with something in hand “to ease the pressure from his family members”; and (b) there was a collateral agreement that the plaintiff would finally clarify the actual amount due by the defendant.  The use of the expression “finally clarifies” is curious but having regard to the defendant’s affirmations, I will proceed on the basis that under (b), what was meant by “finally clarifies” was at a minimum the provision of supporting documentation by the plaintiff to substantiate the figures contained in the handwritten calculations.  Pausing here, I would observe that the two defences do not sit happily together since the first is predicated on the cheques never being presented at all whilst the second contemplates the cashing of the cheques albeit upon certain conditions being satisfied.

10.  It is trite law that a cheque is an unconditional order in writing, addressed by a person to his banker, signed by the person giving it, requiring the banker to whom it is addressed to pay on demand a sum certain in money to or to the order of a specified person, or to bearer.  As a written contract, it is subject to the parole evidence rule the effect of which is to bind a party to his contract as written on the instrument.  Extrinsic evidence is, in general, inadmissible to prove that the terms of the contract differed from those expressed in writing on the cheque.  Thus whilst parole evidence is admissible to prove a contemporaneous oral agreement that the contract was not to become operative except upon the fulfilment of a condition, such evidence if it be evidence in defeasance of a party’s liability on the bill is inadmissible.  As Mills-Owens J explained in Great Sincere Trading Co Ltd v Swee Hong & Co. [1968] HKLR 660 at 665:

“If the existence of the written contract has to be conceded, as it must on the giving of a cheque, oral evidence is inadmissible to vary or contradict its terms.  It may be said that what the defendants seek to allege is a contemporaneous oral agreement showing that what purported to be a complete contract, the cheque, never came into operative existence (Chalmer’s (13 Edn.) p.57).  In my view, that is not the proper interpretation to be placed upon the alleged oral arrangement, which, as I see it, sought to qualify the order for payment, to qualify the tenor of the instrument, to operate in defeasance of it, not to suspend the contract embodied in it.”

11.  Great Sincere Trading as well as leading English authorities such as New London Credit Syndicate Limited v Neale [1898] 2 QB 487 at 490, 491 were cited with approval in Suen Ho Sun v Kamenar International Ltd [1989] 1 HKC 135 at 138H where Hunter JA unreservedly endorsed the general principle that attempts to rely on a contemporaneous oral agreement to alter the terms of payment “are quite inconsistent with the written instrument and are not admissible in evidence”.  As noted in Chalmers and Guest on Bills of Exchange and Cheques, 16^th Edn (at 2-155):

“Most cases where the parole evidence rule has been applied are cases where a party to a bill or note has sought to qualify his absolute undertaking on the instrument by producing evidence of a contemporaneous oral agreement in defeasance of that undertaking, that is to say, that his liability is to be enforceable against him only in certain contingencies or that it is to be postponed to a time later than that expressed on the face of the instrument.  Since the effect of such evidence would be to contradict the terms of the instrument, it is inadmissible.”

12.  There is a dispute between the parties as to whether all four cheques totalling $1.7 million odd and dated 22 April, 22 June, 22 August and 22 October 2005 were given to the plaintiff on or about 15 April 2005 as is the plaintiff’s case or whether the first of the four cheques was given to the plaintiff when he visited the factory in mid-April 2005 and the other three a week later.  Be that as it may, so far as the first pleaded ground of defence is concerned, namely, to ease the pressure from his family, any oral agreement to that effect is inadmissible under the general principle set out above.  The effect of such an oral agreement is indistinguishable from, for example, Prosperity Lamps & Components Ltd v Rotegear Corp Ltd [2000] 2 HKC 638 where post-dated cheques were issued as a favour so that the cheques could be shown to the accounts department in order to alleviate the pressure on the plaintiff. Such evidence was held inadmissible as the alleged oral agreement would render the cheques meaningless.  See also SY Chan Ltd v Choy Wai Bor [2001] 3 HKLRD 145 at paragraph 31 for other examples of similar agreements.

13.  As to the other pleaded defence, namely, that the cheques were not to be presented for payment until certain conditions were satisfied i.e. upon the plaintiff providing supporting documents “to support, clarify and/or verify” the figures in the handwritten calculations, the effect of the oral agreement would similarly render the cheques meaningless.  This is because according to the defendant’s elaboration of the oral agreement as set out in his second affirmation quoted in paragraph 7 above, the condition itself is uncertain: it is not only a question of supporting documents being provided, but also opportunities for correcting miscalculations (if any) and repayment by 3 instalments which, inevitably, must render it wholly at large and uncertain when the obligation to pay would crystallize if at all.  No date was stipulated for the performance of the condition and no dates specified for the 3 instalments.  If the latter are taken to be the dates specified on the dishonoured post-dated cheques, was it then part of the condition that the supporting documents and the correction of any miscalculations all had to be completed prior to 22 June 2005, the date of the first in time of the three dishonoured cheques?  But there is no question but that the cheques were duly delivered to the plaintiff.  They were not delivered in escrow.  That being the case, I cannot see that it is open to the defendant to rely on the contemporaneous oral agreement that he alleges for that evidence is, on the authorities, inadmissible.  See also Neo-Concept Industrial Co Ltd v Sportex Industrial Ltd [1992] 2 HKC 452 where the defendant unsuccessfully sought to argue that evidence of an oral agreement that the cheque was delivered conditionally on the plaintiff delivering documents containing the required accounting and financial information.

14.  At the appeal hearing, the question of the failure of consideration was also raised.  So far as total failure of consideration is concerned, the evidence filed by the defendant did not remotely demonstrate that to be the case.  So far as any partial failure of consideration is concerned, it was held in the Suen Ho Sun case that for such a defence to succeed, the quantum in question would have to be ascertained and liquidated.  As there is no such quantification in the present case, this defence cannot avail the defendant.

15.  In my view, no valid defence has been raised to the plaintiff’s claim on the three dishonoured cheques.  I would therefore dismiss the appeal.  I would also make an order nisi that the costs of the appeal be to the plaintiff.